Insurance For Tax Saving

Come April and tax payers rush to make their investments in a range of tax-saving products. Jay Sampat advises you on the pros and cons of investing in insurance to save on taxes.

Experts are of the view that having multiple insurance polices makes no sense. Inspite of this, we often come across people who have five or more insurance policies.

More importantly, almost 70 per cent of all insurance policies are bought in the last three months of a financial year – this indicates that many of these plans have been bought with the sole intent of saving tax. As a result, there is a new insurance policy every year and consequently, over time, the number of policies adds up, albeit sub-optimally.
It is often said that there are only two certain things in life – one is death and the other is income tax. In India, death may be certain but income tax, with its various rules can be navigated profitably. Let us briefly examine the tax benefits associated with insurance.

1) Deduction Allowable From Income For Payment Of Life Insurance Premium (Section 80C)

Section 80C offers a wide range of options, each suited to a different need. You should choose an option that fits into your overall financial plan and not because it offers good returns or your close relative is selling it. It is easier to identify the best option if you do not leave tax planning for the end of the financial year but invest regularly during the fiscal year. Allocate your Rs 1 lakh limit across different Section 80C options as dictated by your financial goals, by following the same principles of asset allocation that apply to other investments. Here’s a look at some of the options available to you:

(a) Life insurance premia paid to keep a life insurance policy active on the life of the assessee or on the life of the spouse or any child of assessee and in the case of HUF, the premium paid on the life of any member under an insurance policy (other than a contract for a deferred annuity) issued on or before the 31st day of March, 2012 shall be eligible for deduction only to the extent of 20 per cent of the actual capital sum assured.
(b) Life insurance premia paid in order to effect or to keep in force an insurance on the life of the assessee or on the life of the spouse or any child of assessee and in the case of HUF, the premium paid on the life of any member, under an insurance policy (other than a contract for a deferred annuity) issued on or after the 1st day of April, 2012 shall be eligible for deduction only to the extent of 10 per cent of the actual capital sum assured.
(c) Contribution to deferred annuity plans in order to effect or to keep in force a contract for deferred annuity on his/her own life or the life of his/her spouse or any child of such an individual, provided such contract does not contain a provision to exercise an option by the insured to receive a cash payment in lieu of the payment of annuity is eligible for deduction.

2) Deductions Under Section 80CCC

Deduction to an individual for any amount paid or deposited by him/her from his/her taxable income in pre-defined annuity plans for receiving pension. The aggregate amount of deduction under u/s 80C, 80CCC and 80CCD shall not in any case exceed one lakh rupees. However, there is no sectoral cap, i.e. the limit of Rs 100000 can be exhausted by paying a premium under any of the said sections.[PAGE BREAK]

3) Deduction Under Section 80D (Mediclaim)

a) Deduction allowable upto Rs 15000 is allowed to keep in force the health insurance of an assessee or his/her family (i.e. spouse and dependent children) or any contribution made to the central government health scheme or on account of preventive health checks.
b) Additional deduction of upto Rs 15000 if an amount is paid to keep in force an insurance on the health of parents or on account of preventive health checks of the parent of the assessee, whether dependent or not.
c) In case of HUF, the deduction allowable upto Rs 15000 if an amount is paid to keep in force an insurance on the health of any member of that HUF.
d) In case the amounts are paid in (a) or (b) or (c) on account of preventive health checks, the deduction for such amounts shall be allowed to the extent that it does not exceed in aggregate Rs 5000.

If the sum specified in (a) or (b) or (c) is paid to keep active a health insurance of any person specified therein who is a senior citizen( sixty years or more during the previous year), then the deduction available will be upto Rs 20000.

4) Deduction Under Section 80DD

Deduction from total income upto Rs 50000 allowable on an amount deposited towards an approved scheme for maintenance of a handicapped dependent (Rs 100000 where the handicapped dependent is suffering from a severe disability).

5) Income Tax Exemption On Maturity/Death Claims Proceeds Under Section 10(10D)

Maturity/death claims proceeds of life insurance policy, including the sum allocated by way of bonus on such a policy is exempted from income tax. However, any sum (not including the premium paid by the assessee) received other than the death claim under an insurance policy issued on or after the 1st day of April, 2003 but on or before the 31st day of March, 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds 20 per cent of the actual capital sum assured will no longer be exempted under this section. Further, any sum (not including the premium paid by the assessee) received other than death claim under an insurance policy issued on or after the 1st day of April, 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds 10 per cent of the actual capital sum assured will no longer be exempted under this section.

Every product has a cost attached to it, and so does insurance. Excessive insurance injures financial health, and hence, one should never buy an insurance product with the sole purpose of saving taxes. That would be like meeting a short-term liability with a long-term obligation – the tax payable being your short-term obligation that you have to fulfil for that particular year. However, insurance products are of a long-term nature, and you may find that though you may have saved the tax for that particular year, you will be paying for it by way of future premiums for many years to come. A better way to save on taxes would be to make use of instruments with higher returns such as Equity Linked Savings Scheme (ELSS) funds, or if you are risk averse, instruments such as Public Provident Fund (PPF) or post office deposits.

It goes without saying that there is no substitute for life cover. It is the only means of providing financial security to your near and dear ones in the event of your death or to yourself in your old age. However, tax-saving shouldn’t be the prime motive for which insurance cover is bought. Rather, the cover or protection must override all other considerations.

To reiterate the message, think of insurance as a cost and not an investment. Incur the cost only if you need to. Always buy pure insurance policies and not ones that are bundled with investment returns.